Brokers upgrade Westfield to 'buy'

Westfield's strategy to re-weight its portfolio to dominant malls with income-generating management fees has led brokers to upgrade the stock to a "buy" rating.

In the past year, the group has raised more than $2 billion via the sale of half shares in core centres and full holdings in what it has deemed non-core malls, mainly in the mid-western parts of North America.

The philosophy of the company is to "recycle" cash from older shopping centres that have limited redevelopment opportunities, and feed its $12 billion plan to develop centres in what it sees as emerging areas such as Milan and, later, South America.

The plan is to build a presence in countries where the market for enclosed Westfield-style malls is less mature than the traditional countries of Australia, New Zealand, Britain and the US.

Analysts at Moelis said the deal to sell the seven non-core US assets and increase earnings from the management business, was sound because it would expand return on equity and earnings per security.

"We believe Westfield can again trade on a 4.5 per cent yield," Moelis analysts said. "If we take our 2014 distribution per security estimate of 54¢, this implies a share price of $12, which is fairly consistent with our 12-month target price of $12.49.

"This would be augmented by long-term EPS growth of at least 5-6 per cent, albeit this may be less consistent in the short term as the timing of divestments may not always be matched exactly with the execution of the buyback and the returns from development investment.

"We upgrade our recommendation from hold to buy."

At the half year results in August, Westfield's co-chief executive Steven Lowy said the group planned to raise funds from the sale of non-core assets and use the funds to boost the growth of its technology company, Westfield Lab.

He said the use of social media and online shopping was a significant plan for Westfield.

According to John Kim of CLSA, Westfield is seeking to replenish realised development profits from Westfield Sydney and at Stratford in east London, for which he estimates Westfield will book $118 million and $50 million in 2013-14.

"We estimate Westfield will start $8.9 billion developments by 2017, which may provide potential gains of up to $488 million," Mr Kim said.

Another source of future profits may be residential developments, as it has approvals for up to 2622 London apartments adjacent to its existing centres.

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